How to identify and address climate risks in your supply chain

How to identify and address climate risks in your supply chain

In 2010, massive flooding in Pakistan profoundly affected the country and disrupted supply chains globally, spiking international prices for cotton, rice and wheat. This was only one in a string of weather disasters — including heat waves, hurricanes and wildfires — that have affected supply chains on a large scale in the past decade.

Despite the enormous value at stake, climate risks in supply chains can be hard to see because they are so large. The key to getting it right, according to Acclimatise CEO John Firth, who spoke at the BSR Spring Forum last week, is for managers to address supply chain climate risks in terms of existing stressors — such as procurement costs, on-time delivery, water availability and secure energy and infrastructure.

At the forum, speakers and participants identified three lenses that can help company managers connect climate change to existing supply chain concerns.

Vulnerable regions

The economic costs of climate-related disasters are rising, in large part because business is consolidating in vulnerable regions in the name of market growth and efficiency. It is projected that by 2070, seven of the 10 largest economic hubs will be in the developing world, and assets exposed to floods will rise from 5 percent to 9 percent of global GDP.

The good news is that most companies have processes in place to help managers think about economic and socio-political risks in emerging regions. Managers responsible for understanding local risk should consider how weather and environmental changes will create more stress on vulnerabilities they are already addressing, such as on the price and availability of crops, continuity of logistics and safety and security of operations.

Categories at risk

Sustainability professionals also can address climate risk through global supply or procurement categories dependent on stable climatic conditions, such as crops, capital-intensive infrastructure and water-intensive operations.

As Firth explained in the session “Climate-Compatible Supply Chain,” climate impacts on product categories can have global, domino effects. Pakistan's 2010 floods caused rice production to fall, increasing crop prices. This prompted consumers to buy wheat, which increased the price of that commodity and, in turn, the price of cookies in the U.K. In addition to identifying categories that are directly exposed, managers should think about the impacts caused by changes in the markets of substitutes.

Sustainability destabilizers

Finally, climate change undermines companies’ ability to address material sustainability issues. Many companies are working to improve economic development in the communities in which they operate, yet climate impacts, especially disasters, can depress job markets for years. Or, while it is typical for companies to commit to reducing greenhouse gas emissions, the lower water runoff associated with droughts can reduce the capacity of hydropower, the most mature source of renewable power.

Therefore, a third lens for adapting supply chains to climate change is considering how weather disruption and ecological change can affect existing strategies for sustainability.

When considering risks in the examples above, technical factors are at play at individual site levels, such as engineering, building materials and land use. But the failures that bring supply chains down are different. Disruptions that have impact at such large scales are a result of systemwide weaknesses that include the collective vulnerability of many suppliers, governments whose resources are overwhelmed and communities that lack the ability to effectively respond to emergencies and environmental change.

In effect, companies must consider not only individual, facility-focused challenges, they also should pay attention to capacity at the regional level, while building coalitions with peers, businesses across sectors, and local authorities to adapt to climate change systemically.